How will stocks perform in 2014? City gurus offer market forecasts and tip the sectors and shares to watch next year

Even after recent stock market falls the FTSE 100 has gained around 8 per cent this year, but can equities rise further and even hit an all-time high in 2014?

Financial markets are expected to be heavily influenced by how fast the US Federal Reserve scales back its equity-friendly stimulus programme.

Although intended to support the US recovery following the 2008 financial meltdown, plenty of the cheap money pumped into the system by the powerful central bank has ended up in stocks and helped to fuel a global rally.

Market watch: Overwhelming consensus is that 2014 will be another good year for stocks

Next year will mark a post-crisis turning point, as the Fed plans to cut its monthly stimulus outlay by $10billion (6billion) to $75billion (£46billion) and gradually reduce it from there. Markets will be left to fend for themselves again, eventually.

Despite recent sluggish trading, the FTSE 100 is still up so far this year at about 6,500, and this comes on top of a 5.9 per cent gain in 2012.

We round up what share experts have to say about prospects for 2014, and take a closer look at some of their sector predictions and individual stock calls.

How will stock markets fare next year?

'Equity markets started 2013 with a bang, but now seem set to end the year in a whimper,' says Mike Ingram, market strategist at BGC Partners. 'Recent record highs in the US have caught headlines, but globally stock markets have done little better than range trade for the last two months.'

Ingram says the overwhelming consensus is nevertheless that 2014 will be another good year, with company earnings supported by a broadening uptick in global economic growth.

But he thinks the returns profile in 2014 could be the reverse of that in 2013 - weighted towards the second half - and predicts company earnings will assume greater significance in the year ahead.

'Concerns over the start (and then the pace) of Fed tapering will keep the market guessing,' says Ingram.

'It also seems unlikely to me that 2014 as a whole can replicate the returns seen this year, but if the prognoses of usually downbeat economists are correct, we can expect respectable single-digit returns of the next 12 months or so. Let’s hope they’re right. In any event, by the standards of recent years, 2014 looks set to be dull.'

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, says there is a risk of a market correction given the strength of the US and UK markets over the past couple of years.

'Any such dips may provide selective buying opportunities, but the atmosphere would nonetheless be uncomfortable - even if they are necessary to let some air out of the tyres - and could even run the risk of altering sentiment,' he says.

But Hunter adds: 'Equities remain the investment destination of choice. The interest rate environment looks likely to remain at or near historic lows for some time to come, which means that investors will be looking for income as well as growth potential.

'Blue chip equities selected on a bottom up approach for their strength, cash generation and stability are an obvious fit.'

Guy Foster, head of portfolio strategy at Brewin Dolphin, sticks his neck out to predict the FTSE 100 will reach 7,400 (from 6,500 at the time of writing), the US S&P500 will hit 1,900 (from 1,790), and Japan's Nikkei will make it to 18,000 from 15,150).

'We see equities becoming the asset class du jour for investors,' he says.

Trading trends: FTSE 100 has recovered to hit highs not seen since the financial crisis in 2008

So which UK sectors and stocks might outperform next year?

Valuations remain attractive especially when compared with other asset classes, according to James Griffin, portfolio manager of the Fidelity MoneyBuilder Growth Fund.

'I have been positive on domestic UK companies for some time now and I’ve shifted the portfolio away from international franchises towards industry winners that have more of a domestic focus,' he says.

Griffin says the financials sector is a clear beneficiary of the recovery, as banks have been shifted since the financial crisis towards much more stable, cash-generative business models with a lower tolerance to risk.

'For example, Lloyds now has a dominant market share in retail banking and mortgages in the UK, and while it has performed well recently, there is still significant potential for rerating in my view.'

Griffin also likes the secondary property sector, which he thinks offers investors 'a great risk/reward payoff' at the moment.

'These stocks, which own and develop property outside of prime city centre locations, have been trading at deep discounts to their NAV [net asset values] for some time, as investors have considered their portfolios too risky given resoundingly negative views on the UK economy and the consumer in particular.

'The sheer number of secondary property stocks available has made picking the right ones a challenge.'

Griffin expresses caution about commodities and retailers, and adds: 'While politics have clearly been beneficial for the housing sector, other areas have not benefited from political interference – the utilities sector in particular is one that I am very cautious of.'

However, he remains on the search for UK stocks which are benefiting from the current surge in confidence but haven't been spotted by the market yet.

Hunter reckons the pharmaceutical sector is one to watch, after spending some years in the 'investment wilderness' but having nonetheless outperformed the FTSE All-Share over the past five years.

He says reasons for its unpopularity are the lack of new blockbuster remedies, patent expiring which hit the discovering company’s profits, healthcare austerity, ongoing uncertainty in the US system, litigation, and a generally poor economic environment.

But Hunter says the longer-term picture remains positive due to an ageing global population, the rising trend of obesity around the world, the emergence of a new middle class in some of the world’s fastest growing economies, and the reinvention of the sector as more of a business and less of a laboratory.

'Despite the concerns, these remain cash generative machines, which has enabled acquisitions, share buyback programmes and generous dividend yields – GlaxoSmithKline, for example, currently yields 4.5 per cent and AstraZeneca 5.3 per cent.'

When it comes to individual stocks, Hunter suggests it's worth keeping an eye on global marketing company WPP.

'Its companies work with 350 of the Fortune 500 companies, all of the Dow Jones 30 constituents and its list includes the likes of Colgate-Palmolive, Danone, Ford and Shell.'

He highlight three factors that could benefit WPP in 2014: advertising budgets are cut during times of hardship but reappear as confidence returns; companies can only cut costs to improve profits for so long, but eventually fresh growth is required and usually accompanied by marketing; advertising opportunities will arise from the US mid-term elections, the winter Olympics in Russia and the football World Cup in Brazil.

'Despite a 51 per cent rise in the share price over the last year, the market remains excited about both medium and longer term prospects for the company. WPP is something of a market darling and the consensus remains rooted to a strong buy,' says Hunter.